BEWARE OF THE INVISIBLE LINE IN THE BANK

You mean you didn’t know there was an invisible line in your bank? That’s because it is invisible after all. No one will dare to point it out to you. “Then why is this important at all,” you may ask. Because what you don’t know may come back to bite you.

I’ll give you an example. One day a client of mine, Mrs. Prudent (the name has been changed to protect the gullible), went into her bank to deposit a check. It was a check for a large sum of money.

Mrs. Prudent had sold her small, home-based business. She wanted to fully retire and take things easy. She was eighty-two. She intended to open a certificate of deposit.

A CD, she knew, is insured by the Federal Deposit Insurance Corporation up to $250,000. This was the amount of her deposit. She felt good, she knew her money would be safe.

That was when the teller told her she must see the investment advisor at the bank. He would help her with her deposit.

The investment advisor was very pleasant and cordial. He certainly looked and talked like he knew what was best. He said that the bank now had an account for her that would pay more that the existing rate for a jumbo CD. This account would also grow faster than her deposit could.

Mrs. Prudent was absorbed in the banker’s explanation. She felt like she was in good hands. It was her bank after all.

When all the soothing talk from the bank investment advisor was finished, Mrs. Prudent left her money in his hands. He gave her a paper that looked like an official investment document. It didn’t look quite like her previous CD’s. But she was comfortable. She had dealt with this bank for years.

What Mrs. Prudent didn’t realize was that she had crossed the invisible line in the bank.

You see, banks can now offer financial products which are in no way associated with the bank. They are now in the investment business. The banks investment officers get paid a little differently than the bank employees. They may make commissions on the sale of other investment products.

The transactions on one side of the invisible line in the bank are insured by
the Federal Deposit Insurance Corporation. They are bank products.

On the other side of that invisible line, the banks investment officers may place your money in investments, insurance, and annuities which aren’t the products of the bank at all.
These products are not insured by the Federal Deposit Insurance Corporation. They bear the risk of other types of investments. They may fluctuate with the stock market.

This is fine, if you know that’s what you are getting. But it does come as a surprise to many.

Some time later, Mrs. Prudent came to see me about updating her medical power of attorney. While she was talking with me, she mentioned that it seemed odd that her bank CD seemed to lose some of its value.

“What do you mean,” I asked.

She produced a copy of a statement which showed that the value of her “CD” was now less than the $100,000 she had originally deposited with the bank.

After a review of the statement, I explained that the “CD” was not a CD at all. It was a variable annuity issued by a large insurance company, and it was based on the performance of the stocks held within the annuity.

“What do you mean,” she asked. “I opened this account at my bank.”

“ Yes,” I explained, “but it was issued on the financial advisor’s side of the invisible line at the bank. It was not a bank product at all, much less a CD.”

The account had lost value because the stocks which were held in her variable annuity had lost value in the stock market.

“I don’t invest in the stock market,” she argued.

“Oh, but you do,” I responded. What you ended up with at the bank was not a CD. As I explained, it was a variable annuity.

A variable annuity is a product which varies (hence variable) according to the stocks held by the insurance product, the annuity. You were not dealing with the bank, you were dealing with the investment advisor who happened to be at the bank. You crossed the invisible line.

Mrs. Prudent was flustered. “This isn’t what I wanted,” she shrieked. “I just wanted my money to be safe and earn a fixed percent. I wanted a CD!”

I had to agree. Mrs. Prudent had no business investing in the stock market. Or in a variable annuity, which is nearly the same thing.

At her age there would not be enough time to recover any loss in the value of her investments. Safety had become more important than growth, or even the potential for growth.

If the annuity Mrs. Prudent had invested in were a fixed annuity then everything would be all right.

With a fixed annuity there is no threat of losing the principal. All principal is guaranteed. Some states have even passed laws securing the funds held in a fixed annuity. It is safe from lawsuits and creditors. So all in all, a fixed annuity is not a bad investment.

And a fixed annuity would most likely have paid more interest than the banks certificate of deposit. And it would have been as sure and protected as the banks certificate of deposit.

But that is not what the bank investment advisor wanted to sell her. You see a variable annuity generally pays a larger commission to the bank financial advisor than would a fixed annuity.

We went to the bank together. When I objected to the way Mrs. Prudent was sold a variable annuity when she wanted a CD, the bank disagreed.

When I explained that Mrs. Prudent was eighty-two and had no business being in the market, the bank disagreed.

When I asked if Mrs. Prudent’s funds could be returned and placed in a safe account, the bank said no. The bank generally refused Mrs. Prudent’s requests.

Their position was that Mrs. Prudent should have known about the invisible line in the bank, that is the difference between banking activities, and investment propositions.

The best notion it seems to me, is to let banks do your banking, and let investment advisors advise you about investments. Insurance representatives would be the ones to talk to about insurance. And annuity promoters would be most helpful when considering annuities.

In any event, see your estate planning attorney before completing any such changes. You would be wise to make sure whatever you do coincides with your estate plan. You don’t want to undo any of your careful planning. There is an invisible line.

Do you know where the invisible line is in your bank?

A common comment that I hear is something like this: “But I don’t have to worry about probate, I have my own will.”

That’s a common misconception. But by their very nature a will has no legal effect until the death of the person who’s will it is. And for that reason, to give the will it’s authority, or to carry out the terms of a will, it must be supervised by a Court of Law. That means probate. The probate court grants the authority for the terms of a will to be complied with.

Most people, when they learn about probate, and what it is, want to avoid it in their own case. Probate ties up the estate for a period of about 1 to 2 years. Or eleven years in Howard Hughes’ case.

Probate costs an average of 5 to 10% of the value of the estate assets in court costs and attorney fees.

Court records, by their very nature, are public records. Settlement of an estate can lose all the privacy for the heirs.

Their are 3 ways to keep an estate out of the probate court upon a person’s death. One, have a will like this: “Being of sound minde, I have spent all my money while I was still living.” The danger of that is to run out of money before you run out of life.

The second way is to have an estate that is of less value that your resident State’s probate exemption amount. This is different in every State. It ranges between $5,000 and $100,000. So check your State laws to see how rich you have to be to have your estate go through probate.

The third alternative is to have nothing in your name at the time of death. The way to do this is to hold assets in joint names with someone else (which creates another problem). Or you can have your assets titled in a revocable living trust. This is becoming by far the most popular method to avoid probate. Check it out.

It’s true. Everybody has a Last Will and Testament. Everybody. The question is: Was your Last Will and Testament prepared by you, or was it prepared by your State Legislature?

You see, if you haven’t drafted your own will, then yours will be the one designed by your State’s law. It’ll be the one prepared by the legislature in the State where you resided at the time of death. Such laws are referred to as intestate laws. One who dies without a will, dies intestate.

The intestate laws generally require that the decedent’s assets be distributed to their next of kin. Heirs may receive a share of an intestate estate after they have reached the age of 18. The closest relative will be chosen to administer the estate and pay the bills and make the final distributions.

So if you want any say in how your estate will be handled and distributed you must make your own Last Will and Testament.

Start by making a list of your assets and estimating their value. Then decide on your objectives: Do you wish to avoid probate, to reduce the cost of settling your estate, to minimize your estate taxes, to make specific bequests, or name a guardian? What are some of the other things you want to consider?

Then prepare a will, or a living trust, to meet your objectives with your assets. Consider what help you will need in preparing your will or trust. Ask the right questions. Then get it done. Don’t put it off–even if you don’t think it’s urgent. You’ll feel pleased about what you have done.

“The only thing constant in life is change.” -Francois de La Rochefoucauld (1613-1680), a noted French writer and author of Maxims. He was also described as being “gently cynical,” and also said: “Everything is reducible to the motive of self-interest.”

Change happens so often, how do I know if or when it’s time to change some legal documents such as a Last Will and Testament, or a Revocable Living Trust? Here are some things that denote changes in your life. These events should remind you to review and perhaps change your Will (with the motive of self-interest):

1. If there has been a new child born to your family.

2. If there has been a divorce.

3. If there has been a marriage.

4. If there has been a death in the family.

5. If the value of your assets has fluctuated up or down more than $50,000.

6. If there has been an inheritance.

7. If there has been a significant change in your relationship with your heirs or beneficiaries.

8. If there has been a significant change in your medical condition.

9. If your feelings towards family or friends has changed.

10. If there has been a change in the types of assets you own.

11. If you haven’t look at your will or trust for more than eighteen months.

12. If there has been a change in the law (including tax law) which could affect things.

13. If you have received a notice from your lawyer that something should be reviewed.

AND just anytime you feel like it! It’s in your self-interest.

The estate tax is repealed for 2010. There is no estate tax if you die in the year 2010–at least currently.

There are bills circulating in Congress to revive the estate tax, even for this year. Some would like to even roll back the estate tax exemption amount to $1 million, and make this retro-active to the beginning of this year. This, of course, means if successful, a tax would be imposed on estates worth more than $1 million, even on those who die in the year 2010.

If you are in a situation where a spouse died in 2009 ir 2010, and your total estate is worth more than $1million, you may want to take advantage of the use of a marital deduction trust. Such a trust helps you double the exemption amount on your estate.

Just today I met with a client whose spouse died in 2009. Their total estate was just over $3 million. If the surviving wife were to die this year there would be no estate tax under the current law.

However, when we considered the possibility of a roll back in estate tax exemptions for 2010, and if the wife were to die, there could be an estate tax due of more than $1 million. So we considered it prudent to take advantage of the marital deduction trust provisions and avoid this possibility.

The family considered this a cheap insurance policy against any possible change in the law. Right now, the law in this area is uncertain.

So, ask yourself, What is your current situation?